Fund of funds outperform equity diversified funds, indices

Date: Tuesday, March 3, 2009
Author: Rajesh Naidu & Nikhil Walavalkar, The Economic Times

Investors in fund of funds can draw comfort from the fact that such funds--which invest in other fund schemes rather than directly in

shares, bonds or other securities--have fallen lesser than the benchmark Nifty and equity (diversified) funds.

On an average, these funds have given -23.98% and -33.83% return in the last six and one year period respectively. The Nifty in the last six and one year has given -38.03% and -46.82% and equity (diversified) funds returned -36.05% and -47.35%.

Fund of funds have performed better not only due to tactical change in asset allocation to different schemes, but also for adhering to the fund's investment strategy. Take the case of Birla Sunlife Asset Allocation Fund's Aggressive Plan. The fund did a tactical change in its investment mix. In January 2008, the fund invested 23% of the assets in fixed income funds and cash & current assets. The fund invested remaining amount in aggressive equity funds. It was observed that Birla Advantage Fund and Birla Midcap Fund, both put together accounted for more than 60% of the corpus of the fund.

However over a period of time, the fund managers have brought in Birla Index Fund as top holding with 15% weightage. The fund bid adieu to Birla Sunlife Next Millennium Fund - a fund that invests in IT, communication and entertainment (ICE) sectors, and introduced a conservative candidate in the form of Birla Dividend Yield Fund as the second largest holding with 15% weightage. As on Jan 31, 2009 the fund has 25% exposure to debt schemes.

Says A Balasubramanian, CIO, Birla Sun Life Mutual Fund, "We took exposure in our funds that include Birla Sunlife Income Fund, Birla Sunlife Dividend Yield Fund (15%) and Birla Sunlife MNC Fund and Birla Sunlife Index Fund (45%). In such strategy changes we were able to capture interest rates movement benefits."

The tactical change in investment mix has also happened to work for ICICI Pru Advisor Aggressive Plan. The fund’s exposure went up in ICICI Pru Flexbile Income Plan from 18.23% to 29.92% from Jan 08 to Jan 09. At the same time, its exposure fell in ICICI Pru Infrastructure plan from 14.38% to 5.08%.

Franklin Templeton AMC, however, adhered to its strategic asset allocation. It’s FT India Life Stage FOF - 20's plan. The fund maintained its exposure in its funds--Franklin India Bluechip Fund (50%), Franklin India Prima Fund (15%), Templeton India Growth Fund (15%) and Templeton India Income Builder Fund (10%).

Says KN Sivasubramaniam, Senior Portfolio Manager, Franklin Templeton AMC, "Typically, equity fund performance mirrors the movement in the stock markets, while fund of funds with exposure to fixed income assets will outperform. Hence, when the markets are rallying pure equity funds will do well and during periods of sharp declines fund of funds with exposure across asset classes will out perform."

He added, "Typically, tactical asset allocation changes to the portfolio are not necessary as we believe over the long term, capital market trends will reflect the fundamentals, be it in the equity or fixed income markets.”